A small country is considering imposing a tariff on imported wine at the rate of $5 per bottle. Economists have estimated the following based on this tariff amount: $$\begin{array} { l l }
\text { World price of wine (free trade): } & \$ 20 \text { per bottle } \
\text { Domestic production (free trade): } & 500,000 \text { bottles } \
\text { Domestic production (after tariff): } & 600,000 \text { bottles } \
\text { Domestic consumption (free trade): } & 750,000 \text { bottles } \
\text { Domestic consumption (after tariff): } & 650,000 \text { bottles }
\end{array}$$ The imposition of the tariff on wine will cause the surplus of the domestic consumers to _____ by _____.
A)fall; $10 million
B)fall; $250,000
C)fall; $3.5 million
D)rise; $3.5 million

Question

A small country is considering imposing a tariff on imported wine at the rate of $5 per bottle. Economists have estimated the following based on this tariff amount: $$\begin{array} { l l } 
\text { World price of wine (free trade): } & \$ 20 \text { per bottle } \
\text { Domestic production (free trade): } & 500,000 \text { bottles } \
\text { Domestic production (after tariff): } & 600,000 \text { bottles } \
\text { Domestic consumption (free trade): } & 750,000 \text { bottles } \
\text { Domestic consumption (after tariff): } & 650,000 \text { bottles }
\end{array}$$ The imposition of the tariff on wine will cause the surplus of the domestic consumers to _____ by _____.
A)fall; $10 million
B)fall; $250,000
C)fall; $3.5 million
D)rise; $3.5 million

Quizplus · Accepted Answer

The consumer surplus falls because the price increases from $20 to $25 per bottle due to the tariff. The decrease in consumption is 100,000 bottles (750,000 - 650,000). The loss in consumer surplus is calculated as the area of the trapezoid formed by the price increase and the reduction in quantity consumed, which is $3.5 million.

A Small Country Is Considering Imposing a Tariff on Imported